Moody's: Medicaid and Medicare DSH payment reductions could challenge states and hospitals

Global Credit Research - 14 Mar 2013

New York, March 14, 2013 -- The upcoming reductions called for in the Affordable Care Act to federal
disproportionate share hospital (DSH) payments, estimated to rise
to $17 billion annually by 2019, will lead to political and
budgetary pressure on state governments as they seek to replace the lost
funds says Moody's Investors Service. Hospitals providing high
levels of charity care and with heavy Medicaid loads will be most vulnerable
to budget shortfalls because of the DSH reductions.

Pressures will be greatest in states that opt out of Medicaid expansion,
but have a relatively high proportion of uninsured residents, says
Moody's in the report "Reduction of Medicaid & Medicare
Disproportionate Share Hospital Payments a Looming Challenge for States
and Hospitals."

The DSH reductions are expected to be covered by the lower cost of charity
care, as the Affordable Care Act is aimed at lowering the ranks
of the uninsured. However, states that opt out of the Medicaid
expansion, as the June 2012 Supreme Court ruling on the Affordable
Care Act allows, may face large uninsured populations at the same
time that the DSH payments decline.

"States that opt out of Medicaid expansion will have to choose whether
to compensate for the shortfalls with their own funds or leave hospitals
to absorb the costs, which will increase rating pressure on the
hospitals," says Nicole Johnson, a Moody's Senior
Vice President. "States that choose to fund uncompensated
care costs themselves could face budgetary strain."

States use federal Medicaid and Medicare DSH funding, to help hospitals
with large numbers of Medicaid and low-income uninsured patients
provide care.

To date, governors in 14 states have recommended against Medicaid
expansion, and the governors of three states are leaning in this
direction. Seven of those 14 states already have above average
levels of uninsured adults that would qualify for Medicaid under the Affordable
Care Act.

At the hospital level, large urban "safety net" hospitals
that typically treat large populations of Medicaid and uninsured patients
are most at risk from the DSH phase-out, says Moody's.

The increased costs could lead to pressure on some hospital ratings unless
they are offset by higher Medicaid and private insurance rates,
lower numbers of uninsured patients, or backfill funding from states,
says Moody's.

Moody's notes that Medicaid DSH payments are scheduled to be restored
in federal fiscal year 2022, but federal budget austerity could
alter that, as actions to reduce the federal deficit have already
pushed back increased DSH payments once.

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